GoPro: Buy or Sell?

GoPro (GPRO) announced first quarter ended March 31, 2016 total revenue of $183.5 million, down 49.5 percent year-over-year from $363.1 million in first quarter of 2015 and down 58.0 percent sequentially from $436.6 million in fourth quarter of 2015. Going forward, the company estimates complete year 2016 total revenue to be in $1.35 billion to $1.5 billion range.

GoPro declared first quarter of 2016 non-GAAP net loss of $86.7 million or $0.63 of non-GAAP diluted loss per share, down 343.5 percent year-over-year from non-GAAP net income of $35.6 million or $0.24 of non-GAAP diluted income per share in first quarter of 2015.

The action-camera manufacturer reported continued sequential and year-over-year decline in both its top and bottom lines primarily due to the rising competition from other newly emerging camera manufacturers and thus, eating into GoPro’s market share.

What next?

GoPro is continuing to witness near-term weakness in its business with ongoing sequential and year-over-year decline in capture device unit shipments leading to a fall in the company’s top line growth.

Moreover, revenue for GoPro declined due to price reductions made by the company for its latest series of advanced cameras during the conclusion of the previous year and mainly driven by successful countering from sophisticated smartphone manufacturing companies such as Samsung Electronics Corp. and Apple Inc.

Consistent with The NPD Group's Retail Tracking Service, GoPro was among 4 of the latest 5 products unit wise for the integrated digital camcorder/camera segment in the U.S. Particularly, HERO4 Silver captured the highest-selling digital image camera position dollar wise and unit wise. Importantly, HERO4 Session recently captured the second position from the eighth spot held earlier during the fourth quarter of fiscal 2015 unit wise in the integrated digital camcorder/camera segment in the U.S.

The advanced action-camera making company needs to devise solid strategies to successfully offset tough competition arising from the already well-established smartphone manufacturers such as Apple, Inc. and Samsung Electronics Corp., since each have a superior camera quality on their smartphones.

First quarter adjusted gross margin was specifically affected by unfavorable charges of nearly $8 million linked to popular products for marketing growth funds, strategic inventory write-downs and additional purchase commitments. These costs were driven by weaker sales projections for end-of-life HERO products.

Strategic moves

GoPro has a highly-integrated and advanced content management platform including GoPro Studio that has witnessed 52,000 on average in exports each day in the first quarter of 2016, GoPro for desktop which runs every application that could execute on a PC, and GoPro App that has registered about 27 million total downloads including 13 million mobile downloads. Further, GoPro targets on introducing its advanced drone, Karma, during the fiscal year 2016. Also, GoPro has partnered with Facebook, Google and other key technology providers to develop and market virtual reality (VR) devices such as Odyssey and Omni, coupled with the launch of GoPro VR mobile app for seamlessly supporting 360-degree and VR reality.

The strategic entry into the mobile category through the planned development of an advanced app can only be considered late entry into the already hugely-populated mobile devices market segment. Therefore, GoPro is believed to continue to suffer losses and is losing its market share to other already well-settled technology behemoths until GoPro adopts a unique growth strategy focused on recapturing the readily losing market share.

GoPro shares recently grew over 3%, after the action-camera making company registered better-than-estimated sales in the first quarter of 2016, despite posting huge losses and thinning its margins. The company has continued to lose a significant market share to its competitors with having lost approximately 86% of total market capitalization within just one year.

Going forward, the global action-camera market size is projected to expand at a CAGR of over 22% till 2023. By last year, over 7 million units were shipped globally. Therefore, the expanding usage and popularity of key social-networking sites is believed to drive significant industry growth in the forthcoming several years. However, the estimated rapidly increasing sales for the action-camera industry would attract other major players to foray into the industry and thus, majorly eat into GoPro’s market share.

Conclusion

Overall, the investors are advised to “Hold” their position in GoPro, Inc. considering the company’s significant long-term growth prospects being supported by a healthy balance sheet with a notable total cash position of $388.67 million and no debt, encouraging the company to make future growth investments. However, the profit margin of -6.12% seems discouraging and misguiding. The PEG ratio of 0.20 indicates weak company growth and is comparable to the industry’s growth average.